EDS and Kearney: Separation, Not Divorce

August 13, 2003

By Andrew Park The last 18 months haven't been kind to A.T. Kearney, one of the oldest names in the consulting industry. The slump in the market for management advice has decimated billings and forced cutbacks by parent Electronic Data Systems (EDS

. These in turn have battered morale and led to waves of resignations. When Michael H. Jordan took over as chief executive of EDS in March, some investors speculated that he would either divest Kearney or bring it even closer as part of a broader cost-cutting plan.

Leave it to Jordan to pull a surprise. Last month, the laconic CEO quietly restored much of Kearney's autonomy and perks while declaring that he had no interest right now in selling it. Kearney will function as an independently run subsidiary of the info-tech outsourcing giant instead of a "line of business" in its portfolio.

As first reported in Consultants News, a nine-member board will manage the firm and handle back-office tasks such as legal, compensation, recruiting, and benefits, which Kearney had to cede to EDS in recent years. The board, comprising four members appointed by Kearney and five chosen by EDS, met for the first time on Aug. 5. Says one Kearney insider: "We're beginning to get back some of the lost ground."

INTERNAL ANGER. Does Jordan have a soft spot for Kearney? He wasn't available for comment, but a quick look at his bio is revealing: The 67-year-old spent 10 years at consultant McKinsey & Co. early in his career before winning Wall Street's heart by rebuilding Westinghouse in the 1990s.

At EDS, the one-time consultant has moved quickly to address complaints coming from Kearney, including frustration that under former CEO Richard Brown bonuses were cut, pay was based on EDS's performance not Kearney's own, and consultants were penalized for not meeting EDS's cross-selling targets. Now, EDS and Kearney won't approach customers jointly unless asked, according to Consultants News. "The sales-quota thing really didn't work," Jordan said in a July 23 conference call with analysts.

To say the least. Brown's determination to wring synergies out of Kearney had riled many of the firm's consultants, who hated the idea of pushing EDS services on their elite clientele, didn't want to take orders from its Plano (Tex.) headquarters, and believed collaborating provided little value. EDS-ers were also reluctant to team up, bristling at the generous bonuses and art-filled offices afforded top consultants.

UNCOMFORTABLE MARRIAGE. The rift was bared last year when EDS sued longtime Kearney CEO Frederick Steingraber for allegedly falsifying expense reports before his retirement in late 2000 (see BW, 2/10/03, "Family Feuds Don't Get Nastier Than This"). Steingraber shot back with allegations of accounting misdeeds under Brown. The parties are scheduled to resume mediation in the next month, according to papers filed in the case. "It has never been a terribly comfortable marriage," says Alan Pelz-Sharpe, research director at London-based Ovum.

Still, if Kearney's consultants are more comfortable with the freedom afforded by Jordan, they may not be much better off. For one thing, the degree to which Kearney is tossed about by the up-and-down consulting market will stand in starker relief to investors. Revenues at the firm fell 27% in the second quarter, to $212 million, and a recovery isn't in sight. Overall, consulting-industry revenues are expected to shrink a further 2.1% in 2003, to $42.3 billion, after a 7.9% decline in 2002, according to Gartner analyst Lorrie Scardino.

Even if sales do improve, some analysts doubt that Kearney will thrive. While the 77-year-old firm remains strong in nuts-and-bolts operations advice and technology consulting, its connection to EDS has diminished its brand relative to elite independent strategy firms such as McKinsey, Bain & Co., and Boston Consulting Group. "It has taken itself out of contention," says Tom Rodenhauser, president of Consulting Information Services.

"NOT A GOOD MOVE." To Rodenhauser and other experts, the integration path promoted by Brown was actually the right course -- even if it ruffled feathers inside Kearney. EDS badly needed to tap Kearney's consulting brains to augment its own brawny IT outsourcing services and compete with IBM (IBM), which last year paid $3.5 billion for PwC Consulting. Together with firms such as Accenture (ACN), Hewlett-Packard (HPQ), and Affiliated Computer Services (ACS), they're chasing the emerging field of business-process outsourcing, in which customers hand over whole functions to be digitally transformed.

"From the [standpoint of] depth and breadth, [Jordan making Kearney more independent is] not a good move," Scardino says. "The fullness of the offering is important for a big player like EDS."

So far, Jordan appears more concerned with stabilizing EDS, which has seen its credit rating slashed and an Securities & Exchange Commission investigation opened into last year's third-quarter earnings surprise. Kearney also has its plate full preparing for a CEO election later this year.

If the consulting market improves, Jordan could decide to cut his losses and spin Kearney off, a task made easier by his recent moves. Some of Kearney's top officers, meanwhile, are still hoping they can buy Kearney back from EDS, an idea that both Brown and Jordan have nixed. For now, they Kearney crew will have to be satisfied with just a renewed taste of freedom. Park covers EDS from BusinessWeek's Dallas bureau